Chapter 7: Perfect Competition
-many firms
-small firms = price takers
-identical products
-firms to enter/leave market
-buyers/sellers have perfect information about the market
Possible Short-run profit and loss situations in perfect competition
-Short-run abnormal profits
MR=MC>AC
Covering total costs and opportunity costs
-Short-run losses
MR=MC<AC
not covering total costs Movement from Short Run to Long Run
-In the long run, firms in perfect competition will make normal profits.
MC=MR
-profit maximization
-P=D=AR=AR (demand is perfectly elastic) MC=AC
-Productive efficiency MC=AR
-Allocative efficiency (Socially optimal level of output)
*Perfect Competition in the Long run is the only structure that can have Profit max, productive efficiency, and allocative efficiency all at once"
-many firms
-small firms = price takers
-identical products
-firms to enter/leave market
-buyers/sellers have perfect information about the market
Possible Short-run profit and loss situations in perfect competition
-Short-run abnormal profits
MR=MC>AC
Covering total costs and opportunity costs
-Short-run losses
MR=MC<AC
not covering total costs
Movement from Short Run to Long Run
-In the long run, firms in perfect competition will make normal profits.
MC=MR
-profit maximization
-P=D=AR=AR (demand is perfectly elastic)
MC=AC
-Productive efficiency
MC=AR
-Allocative efficiency (Socially optimal level of output)
*Perfect Competition in the Long run is the only structure that can have Profit max, productive efficiency, and allocative efficiency all at once"